The Federal Reserve's balance sheet requires a buffer, but the optimal size remains uncertain. Economist Joe Haubrich from the Cleveland Fed suggests the necessary buffer between “ample” and “scarce” bank reserves on the Federal Reserve's balance sheet may be relatively small.

In new research, Haubrich emphasizes the importance of monitoring the ongoing reduction in the balance sheet's size, as other analyses indicate significantly higher buffer estimates. He mentions estimates from other researchers, citing a threshold for reserves somewhere between $900 billion and $3.8 trillion.

Haubrich's analysis, grounded in inventory theory, estimates a buffer of $90 billion to $130 billion. "Other estimates from the inventory model that include possible demand shocks can lead to higher numbers in the range of $800 billion to $860 billion. This range of estimates reveals considerable uncertainty about the size of the needed buffer," Haubrich writes.

Haubrich compares the decision-making involved to arriving at the airport: "This problem is akin to deciding how early to arrive at the airport. Getting there too early means wasting time at the airport, but arriving too late means possibly missing the flight. The key is to choose a buffer that addresses the two costs by finding a balance between letting the federal funds rate get too high versus having a larger balance sheet."

The Federal Reserve Bank of Cleveland, one of 12 regional Reserve Banks in the Federal Reserve System, engages in monetary policy formulation, supervises banking organizations, and supports financial institutions and the US Treasury. It also conducts research, outreach, and educational activities to bolster communities across the Fourth Federal Reserve District, covering Ohio, western Pennsylvania, eastern Kentucky, and northern West Virginia.

Haubrich's Economic Commentary, titled "QT, Ample Reserves, and the Changing Fed Balance Sheet," discusses these insights comprehensively.